Balance between innovation and compliance in Islamic finance

CAPTION: (From left) Ibrahim, Norashikin, ASTRO head of treasury Latifah Mohamed Yusof and Jasani at the Malaysian Corporate Conference 2009 in Kuala Lumpur

By Alfean Hardy
The global Islamic finance sector already has a comprehensive range of products to offer to its clients and consumers but there still remains a need to find a balance between innovation and having to comply with the Shariah regulations if the industry is to continue to grow, several Islamic finance experts said.
In a session at the Malaysian Corporate Conference 2009 in Kuala Lumpur yesterday, Bank Islam Malaysia Bhd's treasury department general manager Norashikin Mohd Kassim said the Islamic finance sector was now at an interesting period.
"It's going to be a US$1 trillion (RM3.54 trillion) industry and it's important for all Islamic banks that any product that we introduce is going to be Shariah-compliant. But, at the same time, we must allow the market to innovate and not to stagnate, to meet market demand," she added.
Norashikin said it was the very nature of Islamic finance and its Shariah-compliance that has highlighted it as a viable alternative to the conventional system.
"It's all about ethical values and postulates the principles of equity and balance, the prohibition of speculation, and the requirement that transactions must create real economic value have helped evert the problems we have today due to the subprime crisis. So, even as we innovate, we must still abide by Shariah-compliance," she added.
Asked why Islamic finance practicioners did not come out with a killer product that did not have a counterpart in the conventional system, Maybank Islamic Bank Bhd acting chief executive officer Ibrahim Hassan said there were already financial institutions that were offering innovate products like musharakah financing.
"These are either pure or hybrid musharakah in the form of consumer and corporate banking or business banking markets. "It's already available but not actively offered by the Islamic banking institutions because it's a new type of risk, you're going beyond the normal lending or financing risk that banking institutions assume.
"It requires different capital requirements and not many institutions are ready to take up this kind of risk. It's already offered and some of the foreign and local institutions have already offered such products," he added. Hong Leong Islamic Bank Bhd shariah and product development head Jasani Abdullah said the question was a popular one.
"It's basically about whether Islamic banks are ready to become direct entrepreneurs. Some (banks) already do that," he said. However, he said that such a move required a massive change in perceptions and profiles.
"The training skillsets for bankers will also (have to) differ. The training is new, the framework is pretty new and is being looked at from time to time to see the success of banks embarking on such (new) portfolios.
"In short, it takes time. Corporates need time to look at such risky-based investments. Bankers also need time to get the skillsets required to do such undertakings because it's not just the bank's shareholders money that's impacted but it will also impact their depositors' money in undertaking such transactions," he added.